It's been a bumpy couple of weeks, but baby bull markets tend to sputter a little sometime between the 60- and 120-day mark. With that in mind, this test of investors' courage seems almost foreordained in terms of where it fits in the larger Wall Street cycle. Yes, things were going extremely well. Yes, stocks were racing back to the levels they comfortably commanded before the pandemic inflated and then deflated a bubble. And yes, that rebound is largely justified. We just need to test that justification in order to shake off our residual trauma from the bubble collapse; and the last few years in general.
This is how stocks normally behave. If the bull market has hit a wall this early, it will be the shortest significant rally in modern history. Bull markets generally run for 5-6 years and even in the depths of the Great Depression, the recovery was both more robust and more sustained. Granted, we live in unusually unsettled times, but sooner or later every statistical aberration reverts to the long-term trend. For the S&P 500 and large stocks in general, that means moving up 8-11% a year across the long term. And for Treasury yields, that means about 1% above inflation.
Keep that last part in the back of your head when people try to tell you that 4% bond yields are poison for the stock market. Across generations, inflation has averaged a little over 3% a year. Adding a full percentage point to that "normal" historical level gives you a number above 4%, which means this is where long-term yields should be. If anything, with the latest read on consumer prices coming in at 3.2%, both inflation and interest rates are exactly where they should be under normal circumstances.
Of course, accepting this argument means letting go of a lot of assumptions and expectations that have accumulated over the last 10-15 years. Extremely low interest rates were a historical aberration left over from the 2008 crisis. They needed to come back up, for a lot of reasons. Whether the trigger that gets them back on track is the Fed or a sudden Treasury credit downgrade is secondary. And stocks have historically rallied in the face of exactly this kind of interest rate environment. This is a market fact. Unless you think something fundamental has broken within the American psyche that will prevent us from rising above all current obstacles like we did in the wake of the 2008 crash, or the dotcom crash, or 911, or World War II, or the Great Depression itself for that matter, the numbers are on our side.
In the meantime, the numbers are not great, but they aren't terrible either. The S&P 500 is up 16% YTD, which is accelerated performance when you look at the statistics. Granted, a lot of investors still have wounds left to heal before they really start feeling good about their experience in the last few years, but things are still moving fast in the right direction. The Nasdaq is up a blistering 30% in barely 7 months. Our stocks, balanced between a strong defense and plenty of aggressive growth recommendations, are right in the middle. We've scored a 22% bounce so far this year. In just another 7 percentage points, we'll be back where we were at the end of 2021 ... right before the zero-rate bubble started to rupture.
The big market benchmarks are in a similar state. Even counting the recent pullback, Wall Street as a whole hasn't exactly fallen off a cliff. Stocks are within sight of record territory. And as you know, these relatively rarefied levels near all-time peaks tend to be a little precarious. Investors and traders challenge every move. The bulls need to fight for every inch. Sometimes we need a little time to build up our strength and go over each wall of worry in turn. But it happens. On average, the bulls run for 5-6 years before a real obstacle gets in the way and forces a major downswing. Across each multi-year run, the market as a whole tends to quadruple in value.
In other words, things look a long way from unsustainable or overheated. This is a pause, not a halt. Corporate earnings support this. This has been a mediocre earnings season but the mood has been more hopeful than depressed and a lot of investors have even showed signs of impatience. People can't wait to see the numbers on the current quarter and then guidance for the end of the year. There's a strong sense that by then, the Fed will be finished raising short-term interest rates, which means the pressure on the economy will not get much worse. And when things can't get much worse, they generally get better from there.
Inflation is no longer accelerating. The Fed is getting traction. Earnings across the S&P 500 are not great, but they aren't plunging either. At worst, the tone reads "stagnation," a stall instead of a swoon. That's not a hard landing. Unless the real cliff is coming, this is the soft landing we needed. The recession so mild that it barely even registers after years of disruption, upheaval and, most recently, an economy too strong for anyone's comfort. When investors run from signs of the job market running too hot, it's really a sign that we could all use a break. The economy needs to cool off. That's what the Fed is doing. The alternative is watching prices keep soaring indefinitely, which creates a vicious cycle in which the dollar ends up much lower. Nobody wants that. This is preferable. This is what normal feels like.
There's always a bull market here at The Bull Market Report. As earnings season winds down, the drama has shifted back to the bond market, which shifts The High Yield Investor into the spotlight as we work to explain how rising yields pushed our stocks back down 3% in the last two weeks. As a result, The Big Picture once again revolves around benchmarking the current stock market environment against history, and finds the results highly encouraging. And if you're still paying attention to earnings, we've got plenty of updates for you as always.
Key Market Indicators
The Big Picture: From Baby Bull To Tempestuous Tot
If you’ve already written this bull market off for dead, we have to admit, you’ve given up on the stock market and we can’t help you. For this bull market to have been born in June and dead by August, the economic environment would need to be worse than it was in 1932, in the deepest depths of the Great Recession. That’s when the shortest bull market in modern memory happened. Back then, investors only got two months after rallying 20% from its peak before the bear recouped control of Wall Street. Those were truly bad times.
But even then, investors who bought the brief rally didn’t have a lot to complain about. That two-month rally sent the S&P 500 up a dizzying 91%. The brief but savage retreat that followed took about 30% off that peak, leaving the market roughly 55% off its low. Maybe you think the world is in worse shape now than it was 80 years ago and the market just no longer has what it takes to recover. In that scenario, you’ve effectively given up on stocks, the economy and the American people.
Because in every other crisis over the past eight decades, the bulls got years to run. Other than the 1932 shudder, the shortest modern bull market lasted 1.8 years, before the grim lead into World War II cut the rally short. Only the 2020-2021 pandemic bubble was anywhere near that truncated. It took real determination for the bulls to start running this time around. The mood bottomed out in October and it took eight months for the S&P 500 to recover 20% from that low point. During that period, it became clear that even the Fed’s aggressive rate hikes wouldn’t be severe enough to crash the economy immediately.
And in the absence of that crash, guess what? We survived. Corporations didn’t implode like people feared. A recession like the one we saw in 2008 didn’t happen this time around. We're thinking the recession is already well underway for corporations. Earnings are down from last year. But in the new third quarter, we’re looking for a slight uptick. Even if that doesn’t happen, the comparisons practically guarantee better times ahead for the end of the year. In that scenario, we’ve already lived through the worst of it. Things get better from here. In a few months, members of the S&P 500 will be getting bigger again in the aggregate. The economy will be growing.
That’s good for investors. It’s hard for stocks to go down for long when the economy is feeding more profit across big companies year after year, which is why bull markets are hard to kill once they get going. Admittedly, it isn’t a smooth ride. The first few months of any baby bull are the most intense. But then there’s generally a lull and a pause for the market to test its convictions. Things slow down. People get nervous and start second guessing themselves. But in history, the bull has never backed down this fast. History can bend, but it rarely breaks. If the bear takes over again, we'll be shocked.
Remember, bond yields move in the opposite direction from bond prices. If bonds are falling and rates rising, that means money is pouring out of that particular side of the global financial markets. Within the dollar sphere, money flowing out of bonds means money flows into cash or stocks. Cash is bad news as long as inflation remains high. You might be able to get 4% in money markets, but you’re probably going to lose it all from inflation. Only stocks can make enough right now to keep ahead of inflation. Some may go down instead but the right stocks have a fighting chance. When that’s the best bet you get, you take it. We have the right stocks.
BMR Companies and Commentary
Moderna (MRNA: $101, down 6% last week)
Get ready for a good long read on this extraordinary company. This is not a 1- or 2-minute read. It will be 5-10 minutes. So, hang on. Here we go.
Leading biotechnology company and mRNA pioneer, Moderna, released its second quarter results a week ago. The company posted $340 million in revenues, down by a colossal 94% YoY, compared to $4.7 billion a year ago. It further posted a loss of $1.4 billion, or $3.62 per share, against a profit of $2.2 billion, or $5.24. This was largely the result of the seasonal nature of its COVID-19 vaccine sales.
While this was expected as the world moves on from the pandemic, the company, however, expects $6 to $8 billion in revenues from its COVID shot this year, with the US alone expected to buy anywhere between 50 to 100 million doses for the fall. Its updated COVID vaccine, targeting the omicron subvariant XBB.1.5. Is still awaiting FDA approval, but will be ready for a rollout over the coming months.
The company is confident of seeing robust demand for the shot, not just in the US, but also in Europe, Japan, and other leading markets. With COVID-19 becoming ubiquitous, Moderna expects this great business to continue. Far from resting on its laurels, however, it has gone all out to ensure its pandemic windfall is used towards developing more sustainable products.
This includes a robust pipeline of vaccines targeting cancer, heart disease, and a slew of other conditions, and are all set to hit the market by 2030. This pipeline includes its experimental vaccine for respiratory syncytial virus, aimed at adults aged 60 and above, followed by its personalized cancer vaccine in partnership with Merck, which passed its first major clinical trial early last month, with flying colors.
The stock is down by 44% YTD and over 78% from its all-time high in 2021, and as such, is quite de-risked. It currently trades under 4 times sales and 35 times earnings, which might seem rich, but is perfectly justified for a growth stock such as this. It has since repurchased stock worth $1.5 billion and ended the quarter with $8.5 billion in cash, $1.2 billion in debt, and negative $230 million in cash flow. Our Target is $250 and our Sell Price is $150. SO, let’s discuss. These numbers are there for you to decide what to do. And each and every one of you has a different scenario of buying the stock. Some of you bought the stock in January 2023 when we added the stock at $193. Some of you bought the stock beforehand in February 2020 at $26. As the stock has come down from the all-time high of $464 in September of 2021, and more recently from the $218 level in January of this year, you have decisions to make on a day-to-day basis. And all of these decisions are personal, based on a myriad of things that are going on in your life. We could list them here, but you know what we mean here. It comes down to a decision that YOU have to make: Do I sell? Do I stay with it? Do I add more? Tough questions. We highly recommend GTC Stop Orders. Good-‘Til-Canceled orders are orders to sell a stock at a certain price. If it hits the number, the order executes and you are out of the stock. If you bought in January, you could have put a stop order in place to sell at say, $181. Or $171 or whatever price you picked. They used to call this order a Stop Loss order because that’s what it does. Now it is just called a Stop order.
We’re not real happy that the market has drubbed this company the way it has. But we believe in the firm long term, and since we are a long-term investment newsletter, we believe in the companies that we follow and if the stock moves lower, in many cases we like it even more than it was at the higher price. That is the case with Moderna. We would buy the stock here as they have a strong, diverse set of new products coming to market this year, in 2024 and 2025, and beyond.
The future looks bright for Moderna. The company has a strong pipeline of new products, including vaccines for influenza, respiratory syncytial virus (RSV), cytomegalovirus (CMV)*, and HIV. Moderna is also developing a personalized cancer vaccine that could revolutionize the treatment of cancer. The potential dollar size of these markets is enormous. The global market for influenza vaccines is estimated to be worth $8.5 billion, the RSV market is worth $2.5 billion, the CMV market is worth $1.5 billion, and the HIV market is worth $30 billion. Moderna could capture a significant share of these markets with its innovative products.
*CMV is related to the viruses that cause chickenpox, herpes simplex, and mononucleosis. CMV may cycle through periods when it lies dormant and then reactivates.
In addition to its new products, Moderna is also expanding its manufacturing capacity. This will allow the company to meet the growing demand for its vaccines and other products. Moderna is well-positioned to be a major player in the pharmaceutical industry for years to come.
Here are some specific examples of new products that Moderna has in the pipeline. The company is committed to using its mRNA technology to develop innovative new treatments for a wide range of diseases:
A bivalent influenza vaccine that protects against both influenza A and influenza B.
An RSV vaccine that is more effective than existing RSV vaccines.
A CMV vaccine that could prevent congenital CMV infection, which can lead to serious health problems in newborns.
A personalized cancer vaccine that is designed to target the specific mutations in a patient's cancer cells.
The company is worth $39 billion now. At its peak, it was worth $189 billion. Can it go there again in the future? We believe so.
Axcelis Technologies (ACLS: $167, down 5%)
High Technology Portfolio
This company is one of the largest suppliers of capital equipment for the semiconductor industry, leading some industry observers to call it one of the most important companies in the world. During its second quarter, despite a glut in the Chip industry, the company has continued its strong streak, with $270 million in revenues, up 24% YoY, compared to $220 million a year ago. The company posted a profit of $62 million, or $1.86 per share, against $48 million, or $1.43, in addition to a beat on consensus estimates at the top and bottom lines. Its dominant position within this space, amid an industry that in many places has been turned upside down, has resulted in substantial tailwinds for Axcelis, something that is unlikely to subside even in the case of a glut in the market.
Axcelis Technologies ended the quarter with an order backlog of over $1.2 billion, including fresh orders of $200 million. This is largely the result of persistent demand for its Purion family of products, particularly from the silicon carbide power markets. These are semiconductors used in cars, particularly electric vehicles, which are growing fast around the world.
The company’s customers span markets of advanced logic chips, memory chips, and storage chips, all of which are set to witness robust demand, as a result of the unprecedented growth in AI, machine learning, and cloud computing. It is further the only ion implant company capable of providing full-recipe coverage for all power device applications, allowing for high-volume, low-cost manufacturing.
As a result, the company has increased its revenue forecast for the full year by $70 million, giving the stock that is already up by 115% YTD, more reason to rally. Axcelis has a strong balance sheet position with $450 million in cash, just $80 million in debt, and $250 million in cash flow. This puts many lucrative value-creation opportunities, such as dividends and stock repurchases on the horizon going forward. Our Target is $150 and our Sell Price is $125. We are raising the Target today to $195, and the Sell Price to $148.
Roku (ROKU: $79, down 8%)
Early Stage Portfolio
Streaming giant Roku caught another break with its second quarter results a week ago. The company posted $850 million in revenues, up 11% YoY, compared to $760 million a year ago, with a loss of $110 million, or $0.76 per share, down from $112 million, or $0.82, in addition to a beat on consensus estimates on the top and bottom lines.
The company posted strong growth across key operational metrics, with total active accounts at 74 million, up 16% YoY, and reaching a level of 25 billion hours streamed on the platform during the quarter, up by 4 billion hours from last year. The Roku channel now accounts for 1.1% of total TV viewership, establishing it as a leading player in the global streaming space, with plenty of room to grow.
The platform’s average revenue per user slid 7% YoY, to $40.67, but this is mostly owing to a global advertising slowdown, which has since started to turn around, as recessionary fears abate. Roku is perfectly poised to reap rewards from this trend, given its dominance in the connected TV space with a market share of 50% in North America, and billions of dollars of unmonetized ad inventory.
Roku continues to face substantial challenges as a result of supply chain constraints and inflationary pressures, particularly when it comes to its hardware business. Its decision to not pass these additional costs onto customers is what led to the string of losses in recent quarters. This same strategy will pay off in the long run, as it faces stiff competition from the likes of Alphabet TV, Amazon, and Apple TV.
The stock is down by over 85% since its all-time high in 2021 but has posted a 95% rally YTD, amid substantial challenges and headwinds. It currently trades at under 3.5 times sales, which is very reasonable for a growth stock with a landed base and massive competitive moats. Roku ended the quarter with $1.8 billion in cash, just $650 million in debt, and $15 million in cash flow. Our Target is $110 and our Sell Price is $62.
With all of this said, we are not very happy about the fact that the company can’t make a profit. Yes, they have a ton of cash to tide them over the next year or two. But gee whiz, after all these years, WHY CAN’T THEY MAKE A PROFIT? We’ve always said to ourselves: When you are not happy about something, you have to take some action. We’re pretty darn tired of waiting for this one, so yes, their future looks bright, but the stock had better move higher, and if it doesn’t, we are going to move on. The way we like to do this is to set a Stop. We would suggest that you put a Sell Stop in place at $74. If it goes there, we are out. If it goes higher, we will move the stop up accordingly over time.
PayPal (PYPL: $62, down 2%)
PayPal released its second quarter results two weeks ago, reporting $7.3 billion in revenues, up 7% YoY, compared to $6.8 billion a year ago. The company posted a profit of $1.3 billion, or $1.16 per share, against $1.1 billion and $0.93. Despite posting in line with estimates, the stock witnessed a pullback following the results, owing to a slew of factors and operating metrics.
During the quarter, the company processed over $370 billion in payments, across 6.1 billion transactions, up 11% and 10% YoY, respectively. It processed 55 transactions per active account, an increase of 12% YoY, with total active accounts growing to 435 million, up marginally from 428 million during the same period a year ago. It is truly an astounding number of accounts.
PayPal is an online payment platform that facilitates payments between individuals and businesses. It is one of the most popular online payment platforms in the world. PayPal is successful because it is easy to use, secure, and trusted by businesses and consumers alike.
PayPal has a new deal with private-equity giant Kohlberg, Kravis & Roberts. According to this deal, the PE firm will be acquiring PayPal’s ‘Buy Now, Pay Later’ loans originated within the UK and other European countries, to the tune of $44 billion, with $1.8 billion in net proceeds to PayPal set to be realized over the next few months alone. This provides the fintech giant with much-needed liquidity and stability, as it forays deeper into the lucrative consumer credit markets. In addition to this, the company has seen enormous traction with its recent rollout of PayPal Complete Payments, onboarding big ticket channel partners, the likes of Adobe, WooCommerce, Shopify, Stack Payments, and LightSpeed among others.
As PayPal grows by leaps and bounds, it hasn’t lost sight of its promise to continue delivering exceptional value to shareholders, with $1.5 billion being returned via buybacks during the second quarter alone. It plans to scale past $5 billion in buybacks in 2023, giving strong support to the stock, while hardly denting its robust balance sheet, with $11 billion in cash, just $12 billion in debt, and $5.8 billion in cash flow. And the firm is quite profitable, as noted above in the first paragraph. The Target is $125 and we would not sell PayPal.
The Trade Desk (TTD: $75, down 12%)
Early Stage Portfolio
One of the largest demand-side advertising platforms, The Trade Desk released its second quarter results last week, reporting $460 million in revenues, up 23% YoY, compared to $380 million a year ago. The company posted a profit of $140 million, or $0.28 per share, against $100 million, or $0.20, driven by its relentless streak of onboarding new brands, inventory, and partnerships throughout the past year.
Despite a beat on consensus estimates at the top and bottom lines, the market reaction following the results put a damper on the stock’s 100% YTD rally. The results themselves had nothing to warrant an adverse reaction, and in our opinion, this was everything to do with the company’s unjustifiably high valuations of 22 times sales and 290 times earnings, many times higher than the industry average.
The Trade Desk is a technology company that helps businesses buy and sell digital advertising. They are successful because they offer a platform that is easy to use, transparent, and effective. The company has a strong focus on data and analytics, which allows them to help businesses target their ads more effectively. While demand for advertising has hit a rough patch over the past few quarters, the company’s precision and transparency-driven platform has remained resilient nonetheless. Its business development initiatives have made its solutions indispensable for large brands, resulting in a 95% customer retention rate for the ninth consecutive year.
In a niche filled with walled gardens from the likes of Meta and Alphabet, The Trade Desk has succeeded by making this business more accessible to everyone. It has continually gained market share at the expense of its two major competitors, and while the threat of Alphabet’s renewed efforts in this space is substantial, TTD’s expansive moats, industry partnerships, and integrations will not be easy to breach.
The stock was upgraded by many firms on the Street, including Wells Fargo, raising their target to $100 from $82. Piper Sandler has a nice round $100 price target, with Morgan Stanley at $105. During the quarter the company repurchased stock worth over $40 million, with a further $360 million in pending authorizations. This should provide it with much-needed support during volatile times like the present. The Trade Desk ended the quarter with $1.4 billion in cash, a mere $250 million in debt, and $630 million in cash flow. Note: We wrote about The Trade Desk in The Bull Market Report of July 17th. Check it out on the website.
HF Sinclair (DINO: $59, up 8%)
Independent petroleum refiner HF Sinclair released its second quarter results two weeks ago, reporting $7.8 billion in revenues, down 30% YoY, compared to $11.2 billion a year ago. The company posted a profit of $500 million, or $2.60 per share, down from $1.3 billion, or $5.59, but the beat on consensus estimates at the top and bottom lines sent the stock on a strong rally from $51, and the $46 level in July. We added the stock at $61 in December, so the weakness this year has been put behind it.
During the quarter, the company was hurt by the drop in volumes due to the drop in energy prices and the economic slowdown globally, along with a slowdown in refining margins. The gross margin per barrel stood at $22, down 40% YoY, compared to $36 a year ago. This was coupled with lower production of 554,000 barrels of oil per day, down from 627,000 barrels during the second quarter of last year. This is in sharp contrast to the previous quarter, when the company looked upbeat as a result of increasing utilization rates, falling oil refining capacities, and a widening crack spread, owing to the normalization of global energy markets. (Crack Spread is the margin or pricing difference between a barrel of crude oil and the finished petroleum products.)
HF Sinclair is an energy company that produces and sells a variety of fuels, including gasoline, diesel, jet fuel, renewable diesel, specialty lubricant products, specialty chemicals, and specialty and modified asphalt. They have a long history in the energy industry, having been founded in 1916. They have a strong financial position and are committed to innovation. The company used its windfall gains over the past year exceptionally well, paring down debt to $3.6 billion, while offering a well-covered annualized dividend yield of 3%, ending the quarter with $1.6 billion in cash, and $2.5 billion in cash flow during the quarter. Our Target is at $72 and our Sell Price is at $51. This is a solid $11 billion company with a strong management team.
Sunrun (RUN: $16.64, down 5%)
Photovoltaic cells and energy storage solutions provider Sunrun is riding the post-IRA high life, as evidenced by its second quarter results two weeks ago. The company posted a profit of $55 million, or $0.25 per share, against a loss of $12 million, $0.06. This was still a fairly mixed quarter, with earnings blowing past estimates by a wide margin, with top-line figures coming in below expectations.
Market reactions aside, this was a spectacular quarter for the company, with 103 megawatt hours of fresh installations, up 35%. Total solar energy capacity installations reached 300 megawatts, exceeding the high-end of its guidance at the end of the quarter. Net subscriber value hit $12,320, up by $320 from the prior quarter. Much of this was made possible by the tax credits availed to consumers since the passing of the $700 billion Inflation Reduction Act last year. With tax credits now covering 30% of the installation costs, solar companies such as Sunrun are on a fiery streak.
The company unveiled a slew of new products and initiatives during the quarter, starting with the Sunrun Shift, a home solar subscription that aims at maximizing value under California’s new solar policy. It further signed a partnership with PG&E to develop a distributed power plant that turns home solar storage systems into resources during periods of peak demand, helping prevent blackouts.
Sunrun is an undisputed leader in an industry that is set to hit $400 billion by 2030, and following a 30% YTD pullback, and an 83% decline since its all-time high in 2021, it is trading at a mere 1.5 times sales. The company ended the quarter with $670 million in cash, and over $10 billion in debt which is concerning, but has the assets and is now generating sufficient cash flow to back this up.
With all of this said, we’re not happy with the performance of the firm. After thinking this through long and hard, we believe their marketing philosophy is skewed. The firm offers solar leases, solar loans, and purchase agreements where customers agree to buy the electricity generated by their solar panels for a fixed price over a set period. They don't have to pay upfront for the solar panels, and they don't have to worry about maintenance or repairs. This all sounds great at first glance, but the financing costs for the firm are exorbitant at $10 billion, which is WAY out of line. We added the stock at $29 and we reluctantly exit the stock here. We will be replacing this with a much better solar option in the coming weeks.
Twilio (TWLO: $62, up 1%)
Long-Term Growth Portfolio
Twilio is the leading provider of cloud-based programmable communications solutions. It released its second quarter results last week, reporting $1.0 billion in revenues, up 10% YoY, compared to $940 million a year ago. It posted a profit of $120 million, or $0.54 per share, against a loss of $7 million, or $0.11, coupled with a beat on estimates for the next quarter sending the stock up from the $58 level following the results.
The company hit a rough patch over the past year, owing to persistent macro pressures, which in turn resulted in longer sales cycles, lower deal sizes, and a substantially lower dollar-based net expansion rate* at 103%, compared to 123% a year ago. The slowdown in the social, streaming, and crypto verticals has made things worse, yet Twilio has successfully managed to hold its ground as things start to turn around.
* Dollar-based net expansion rate (DBNER) is a measure of how much revenue you earned from existing customers due to add-ons, upselling, and cross-selling.
Twilio currently has 304,000 active customers on its platform, against 275,000 a year ago, which is largely in line with estimates. The company’s communications revenues led the way at $910 million, up 10% YoY, followed by data and applications at $125 million, up 12%.
Over the past few years, the company has made significant progress in offering a differentiated customer value proposition. It has done this via acquisitions, partnerships, and integrations, which have since resulted in wide, impenetrable moats. The tailwinds as a result of this are only just beginning to be realized and have since prompted a flurry of analyst rate hikes, with the high end of its target at $110.
The stock is up by 23% YTD, but is still off by 86% from its all-time high in 2021 at $457, while trading at a mere 2.8 times sales, making it a fairly priced growth stock. The company completed $500 million in stock repurchases during the quarter, from its $1 billion in authorizations at the beginning of this year. It ended the quarter with a strong balance sheet with $3.7 billion in cash, $1.2 billion in debt, and a stable cash flow position. Will the stock ever reach its all-time high again? We believe so, but certainly not for a few years. In the meantime, we see steady, profitable growth ahead and look forward to breaching our Target of $135. Our Sell Price is $65, with the stock under that price now, as you know, so if you are anxious, set a sell stop at your pain point, say $55 or so. We don’t believe this can happen, but a lot depends on the world economies and all of the potential negatives in the world. We are optimists, as the American economy and markets have grown through thick and thin, through war and viruses, and bull markets and bears, for 200 years. We’ll come through again, of that there is no doubt.
The Bull Market High Yield Investor
It happened like clockwork. Something nudges long-term interest rates above 4% and a perfectly good rally in the stock market evaporates. This week, the trigger was a shock cut to the Treasury’s credit rating, a significant shift in the bond market but not necessarily anything the rest of Wall Street needs to worry about. Most of the big players blew off the downgrade. Warren Buffett, Jamie Dimon, Janet Yellen, everyone. The rating agency that pulled the trigger, Fitch, is relatively minor, with maybe 15% of the global heft in this space. Neither of the true giants spoke up.
And the timing of this downgrade is strange to say the least. It feels like a PR stunt, a desperate reach for relevance. But for now, that 15% of the world that pays attention now needs to adjust its bond portfolios to mirror this move, which means selling Treasury debt to make room for whatever this agency decides is still worth its top rating. Demand for Treasury bonds goes down a bit. And the laws of economics say that when demand for a thing suddenly drops, the price drops with it. When bond prices drop, yields go up. Suddenly yields on the 10-year are above 4%.
This is a historical pain point for the market. Round numbers scare people. The thought is that if you can lock in 4% a year on bonds for the foreseeable future, enough investors will pull their money out of stocks to buy those bonds. But wait a minute. Money flowing out of stocks into bonds means demand for bonds picks up again. Prices in this scenario firm up. And guess what, yields go down. The situation just resolved itself.
That’s how this works. It’s how it worked in 2011 and it’s how it’s going to work now. Yields have had trouble getting above 4% in this cycle. It’s going to take a massive shift in the landscape to get them permanently above that level now. If you’re worried about yields, buy bonds when they hit 4%. And if you’re unwilling to buy bonds at 4%, stick with the stocks that can deliver better under the right circumstances. Beyond that, 4% is just a number.
After all, there are two things here to keep in mind. First and foremost, when long bond yields are stuck at roughly 4% and the Fed has pushed short-term rates well above 5%, the system is showing dramatic signs of stress. That’s the inverted yield curve that tends to foreshadow a recession. The Fed controls the short end. The market decides the long end. When the market keeps buying so many Treasury bonds that long yields stay below short yields, the market is already so fixated on an economic downturn ahead that the prophecy becomes self fulfilling.
But if long-term Treasury yields were to rise back above the short end of the curve, that recession signal goes away. Keep that in mind when people talk about how lethal 4% really is. The only way this curve can heal is if those long yields climb well above 4% or if the Fed wakes up and decides there’s been a terrible mistake. You know the first scenario is the only plausible one. And that’s the second factor to watch. We remember back to 1994, when Treasury yields started at 5.92% and crossed 8% by November. They didn’t get back below 5.5% until 1998. That’s at least four years the world survived yields much higher than 4%, a period in which the S&P 500 doubled. It was the dotcom boom, one of the greatest rallies in history. And it happened in the face of those rates.
What’s lethal about 4% yields? Fear itself. We’ll get through this. Stocks will recover and get back to work. If yields stay above 4%, it’s going to be a lot harder to argue that there’s a recession looming. And if they fall below 4%, where does all that fear go? For now, if you're happy earning 4% a year, bonds are attractive. If you want more, you need to reach for a few of our higher-yield recommendations like the two profiled here.
Apollo Commercial Real Estate Finance (ARI: $10.74, flat. Yield=13.0%)
High Yield Portfolio
New York-based Apollo Commercial Real Estate Finance primarily invests in real estate-backed debt instruments, including senior mortgages and mezzanine loans. The company released its second quarter results recently, reporting $63 million in revenues, up 10% YoY, compared to $57 million a year ago, with a loss of $16 million, or $0.11 per share, against a profit of $50 million, or $0.35. The numbers were weighed down by net realized losses on investments of $82 million, or $0.61 per share, from a subordinate loan backed by an ultra-luxury residential property. This was a significant event, one that saw a $60 million increase to its special current expected credit loss allowance, bringing it to a total of $141 million. This includes an already realized loss of nearly $80 million on the same Manhattan-based ultra-luxurious residential property and is a reflection of the state of New York’s property market, which continues to struggle with a very tough post-COVID recovery.
The company continues to benefit from higher interest rates because 99% of its portfolio is held in floating debt. This led to another consistent quarter of strong distributable earnings of $0.51, well above the quarterly dividend of $0.35. There has been some talk of a dividend cut, but with the level of coverage, we are not concerned. We believe the likelihood of interest rates remaining high for the foreseeable future is quite high.
Leaving this aside, Apollo’s loan portfolio remains as sturdy as ever, with a total portfolio value of $8.3 billion, a weighted average yield of 8.6%, with nearly 94% of them being first mortgages, making this a good place to be in a high-interest rate environment. The trust further funded two first mortgage loans worth $170 million, and received repayments worth $600 million.
The stock is down by 1% YTD, trading at an enticing 27% discount to book value. Apollo ended the quarter with $370 million in cash, $7.0 billion in debt, and $330 million in cash flow.
BlackRock Income Trust (BKT: $11.82, down 2%. Yield=8.9%)
High Yield Portfolio
The BlackRock Income Trust, one of the leading investors in agency mortgage-backed securities and US Government securities offers plenty of value for conservative investors looking for capital preservation, alongside regular income. With its exposure to quality AAA-rated securities, its risk quotient is only a notch below treasuries and munis, while offering higher yields and avenues for capital appreciation.
Ever since the Fed began its hawkish stance, the fund has witnessed a steady pullback and is currently down 6% this year so far. As a result, it offers an enticing 9% dividend yield, all the while trading at a 5% discount to book. With inflation slowing down, and the Fed’s rate hikes finally coming to an end, this fund represents a stellar economic opportunity during the months ahead.
The thing about this fund is that while it may be affected by macroeconomic headwinds and market volatilities in the short term, for investors with a long enough time horizon, the risk of loss is very low. This is made possible thanks to its exposure to mortgage-backed securities, all insured by Fannie Mae, Freddie Mac, and Ginnie Mae, which while not explicitly guaranteed by the US government, we know for a fact that the latter will step in to keep these entities solvent.
The biggest drawback when it comes to investing in the BlackRock Income Trust is the lack of any significant hedges against interest rate risks. During a high-interest rate environment like the present, a portfolio of mortgage servicing rights offers much-needed cushioning against volatility, but they don’t own any, as Rithm Capital and others do. We feel that the company, at current levels, has limited downside risk as the current interest rate levels are very beneficial for the fund.
Todd Shaver, Founder and CEO
The Bull Market Report
A few traders threw a tantrum last week after Jay Powell said "it would not be appropriate" to cut interest rates in the immediate future. We have to say that while a pause in rate hikes seems imminent, active cuts were vanishingly unlikely unless the banking system collapse. And that's not exactly something rational investors really should be eager to see. So instead of focusing on what it would take for the Fed to suddenly reverse its war on persistent inflation, we'd like to open this Bull Market Report with a survey of the facts on the ground.
The Fed has the best view of the economy and in fact determine its trajectory from month to month. They're effectively saying the sky is too blue and the sun is too bright for comfort. We can disagree with the Fed but they still call the shots. They aren't feeling stormy weather. They want it to get stormier. Over the years we've learned a lot about how Jay Powell thinks. He hates high interest rates. The thought of a severe recession that throws millions of people out of work terrifies him. He'll relax the minute inflation recedes to a tolerable level.
As far as our portfolios are concerned, the world does not appear to be ending, and because other investors keep bidding up many of our stocks, we once again have pockets of fresh profit, keeping our results stable in a month when the market as a whole struggled from time to time without surrendering. Despite all the talk about the Fed breaking things in the Banking industry, the S&P 500 actually managed to shake off all of its Silicon Valley losses to edge 0.2% above its February high just a few days ago.
That's an achievement that would otherwise get lost in the gloom. We like it when the market can support a pattern of higher highs because it means money keeps flowing into stocks across Wall Street's periodic mood swings. Without that virtuous cycle, the bulls simply wouldn't be able to climb each wall of worry. But that's exactly what's happened here. Admittedly, it took several weeks for that to happen and the breakthrough was only a handful of points on the S&P 500 before the latest round of Fed dread took it away.
We're still a long way from fully shaking off the bear's grip on the market. Every shock will stir sentiment and uncover remaining pockets of anxiety. But in every cycle since October, the bulls reach a little higher and the bears fail to push stocks so far down. Life, in other words, starts looking better from month to month. Companies not only learn how to survive shifting economic conditions but demonstrate that they can operate profitably. They're thriving. A lot of our stocks are thriving as well. That would not be the case if the economy were teetering on the edge of a cliff.
In the last two weeks, Energy took a significant step back. That's not a thrill for shareholders, but it's a pretty good indication that inflation is receding with commodity prices. Weaker inflation means the Fed can relax and act to comfort the market in a crisis. If you're afraid of the Fed, this is a good thing for every stock that doesn't make money pumping fuel out of the ground. And if you don't see that, then maybe the Fed isn't really what scares you. Meanwhile, the Financials are relatively resilient. Some innovative names like Bill Holdings (BILL) and PayPal (PYPL) are actually moving up, expanding their market footprint as entrenched legacy Banks falter.
This is how the economy works to create wealth at the expense of old broken ways of doing things. Our High Technology portfolio jumped 4% in the last two weeks. The core Stocks For Success group, dominated as it is by the biggest giants of Silicon Valley, also moved up. Microsoft (MSFT) rebounded 9% over this time period. Apple (AAPL) jumped 5%. Innovation is no longer seen as a problem or a source of empty hype. Serious investors are once again finding these stocks attractive because they represent a solution to the challenges that face us all.
But innovation isn't everything. People need places to live and work, no matter what virtual reality miracles happen in the "metaverse" or elsewhere online. Our Real Estate portfolio rebounded 5% in the last two weeks because the world failed to end. Big landlords didn't collapse. Believe it or not, their management teams have dealt with worse and didn't quit. They survived. And shareholders booked a lot of dividends over the years. That's another place wealth comes from.
There's always a bull market here at The Bull Market Report. This time around, we'd like to conduct a bit of a thought experiment in The Big Picture and take all the dread circulating around the market at face value. "What if," we ask, "the world isn't actually ending? What's the right investment posture for that?" The High Yield Investor takes a similar tone with a discussion of whether Jay Powell could have told the truth when he said the Banking system remains strong and relatively healthy. And as always, we have a lot of stocks to review. After all, it's earnings season. And the season is unfolding a lot better than many investors anticipated.
Key Market Indicators
The Big Picture: "Normal" Is Right Here
We’ve all suffered through a lot together. The last few years have given investors the most jarring ride since the Great Recession. Banks are failing. The Fed seems obsessed with crashing the economy. A lot of people are convinced that the world is on the brink of collapse. The world can end in any number of ways, destroying endless wealth and security in the process. It’s enough to make someone head for the exits. But the question we need to grapple with as investors is a lot simpler: What if it doesn’t?
So let's run a thought experiment and postulate what would happen if the world stubbornly refuses to melt down and everyone on the sidelines misses their chance to participate in the good things the future still has in store. This scenario is not as outrageous as it might look. After all, the latest economic numbers suggest that the biggest immediate fear Wall Street and Main Street currently have to grapple with is the fear of missing out. While some corporations are trimming payrolls, enough are still hiring that unemployment keeps hovering around its lowest level in over 50 years. Wages are up. As the banks have revealed, households aren’t defaulting on their debt in large numbers. And as a result, the economy as a whole keeps growing just a little faster than inflation.
It might feel like a recession to weary workers. It might look like a recession on the horizon to wary investors. But there’s always a recession on the horizon . . . the cyclical nature of the economy ensures that we’re rarely more than a few years from the next one. And when the fundamental numbers keep trending in the bullish direction, experienced investors know that their portfolios will ultimately be worth more as well. That’s crucial in an inflationary world like the one we live in now.
Remember how the math works? When inflation is tracking at 3% over time, your wealth needs to earn at least 3% a year or you are actually losing purchasing power. You’re getting poorer. The Fed wants to drive inflation down to 2%, which is low but still just far enough above zero to penalize everyone so frightened that they can’t bear to do anything with their money beyond hiding it under the metaphorical bed. And right now, prevailing inflation remains high enough that even the highest-yielding bank products just don’t cut it.
That’s why the regional banks are failing, by the way. When their portfolios are stuffed with bonds paying less than inflation, they can’t raise the rates they pay on deposits. So depositors bail out and the balance sheets implode. But we aren’t banks. That’s actually not our problem. Our problem is how we effectively protect our existing wealth and build on it when the world fails to come to a screeching halt. That’s the problem of life. Living costs money. Unless the world comes to an end, you need to keep spending money.
Our solution starts with a little insurance against extended periods of market stagnation like the one we’ve just lived through. When your stocks go nowhere, you need a way to stay liquid. The biggest threat is outside circumstances forcing you to sell in stressed market conditions in order to pay the bills. That’s how hedge funds and retirement plans fail. Survivors keep enough cash flowing to surf the storms. Dividend stocks are a great way to do it. Our High Yield holdings focus on these opportunities to generate current income without selling a single share of stock. That’s our defense.
And anything less than an extreme outcome is temporary and partial by definition. Suddenly you aren’t facing the end of the world; you’re just looking at a stressful environment. Generations of history prove that Wall Street and Main Street alike have survived every shock and come back more resilient than ever. That’s the American way. On average, a year in the market is worth 8-11% above inflation. Some years are a lot worse and some are a lot better, but that’s the average that prevailed in the wake of the dotcom crash and the 2008 crash and even today. Over the past four years, the VIX has gone crazy and the Fed has spun in a vast and terrible circle. Recession and recession shadows have alternated with bear markets and bubbles. The market has still climbed almost exactly 11% a year on average over that period. Compounded.
Now maybe you’re eager to cut out some of the bad times in order to avoid the pain of a losing year for the market as a whole. We get that. Nobody enjoys stress. It isn’t the end of the world, but it can feel like it. Our solution there is equally simple. Nobody’s forcing you to buy and hold the market as a whole. There’s a whole world out there beyond the S&P 500. And there are always relative strong spots in the economy as well as obvious pain points. Last year, if you were brave enough to own Big Energy, you did well. We bought it. This year, Technology is coming back. You keep rotating. That’s life. It hasn’t ended yet. And we roll with the the changes and strive to beat the market averages.
BMR Companies and Commentary
Apple Reports A Quarter That Pleases (AAPL: $174, up 2%)
Stocks for Success Portfolio
Amid bank failures, ceaseless rate hikes by the Fed and a global economy that continues to teeter on the edge of a recession (yet somehow manages from quarter to quarter never to actually fall over the cliff), Apple’s second-quarter results on Thursday were an absolute delight. The tech giant posted $95 billion in revenues, down 3% YoY, compared to $97 billion, with a profit of $24 billion, or $1.52 per share, down from $25 billion, or $1.52.
Despite posting its second straight quarterly drop in revenues, the stock popped 5% on Friday, thanks to the company’s beat on consensus estimates at the top and bottom lines. The stock has remained under pressure throughout the past three months, owing to rumors of a drop in Mac sales, coupled with the slowdown in fulfillment by its largest supplier, Foxconn, both of which were proven to be overblown during the results on Thursday.
The tech giant’s star performer remains its coveted iPhone, posting sales of $51.3 billion, up 1.5% YoY, compared to $50.6. The segment came in well ahead of estimates at $48.9 billion, even as worldwide smartphone sales contracted by over 15% during the same period. Apart from this, the Services business was the only other segment to post a YoY growth of 5%, with $20.9 billion in revenues.
Apple’s other key products - the Mac, iPad, and Other Products, which include wearables and accessories, posted a YoY decline. They each posted sales of $7.2 billion, $6.7 billion, and $8.7 billion, down by 31%, 13%, and 1%, respectively. The company, however, claims it witnessed a steady YoY growth across all key geographies, only to be weighed down by foreign exchange headwinds. We’re not sure we agree with the company on this last statement.
As to the future, the company expects a similar performance overall for the current quarter, as it continues to grapple with macroeconomic pressures, the slowdown in consumer spending, coupled with persistent supply chain issues. To address the latter, the company has gone all-out to diversify its sourcing and fulfillment away from China, in favor of India and Vietnam, among others for a more resilient supply chain. But getting there is a long process, as you can imagine.
In the face of growing challenges, Apple continues to remain the cash cow it has always been, with $29 billion in cash flow during the second quarter alone, of which nearly $23 billion was returned to shareholders in the form of dividends and repurchases. The company has authorized a further $90 billion in fresh repurchases, adding to the $600 billion in buybacks it has completed over the past decade. Now that’s a story!
In addition to this, the company raised its quarterly dividends for the 11th consecutive year, albeit, a small percentage. The company’s cash position continues to fall, at $51 billion at the end of this quarter, with debt of $110 billion, but this is hardly concerning given its remarkable cash flow. If you do the numbers, the firm is making almost $2 billion a week(!) Handing out cash to its stockholders is something the firm loves to do and will continue into the future.
The stock is flirting with its all-time high of $182 set in late 2021. Our Target for Apple is $190, which we are raising today to $220. The Sell Price is: We would never sell Apple.
Energy Transfer (ET: $12.36, down 4%)
Dallas-based Energy Transfer released its first quarter results early last week, reporting $19.0 billion in revenues, down 7% YoY, compared to $20.5 billion a year ago. The company posted a profit of $1.0 billion, or $0.32 per share, down from $1.2 billion, or $0.37, owing to lower energy prices and increased maintenance and operational expenses.
While the results were rather disappointing, in the case of midstream companies, top and bottom-line figures are largely irrelevant, given their vulnerability to energy price volatility. What matters is volumes, and in this regard, the company performed exceptionally well across the board, with its natural gas liquid fractionation and transportation volumes up by 18% and 13% on a YoY basis, respectively.
The midstream segment, interstate natural gas transportation, and crude oil terminal volumes were up by 14%, 11%, and 6% YoY, respectively. The growth in volumes is largely the result of the company’s Gulf Run Pipeline being placed in service, in addition to higher utilization across its Transwestern, Panhandle, and Trunkline systems, given the broad structural shifts being seen across the global energy markets.
We analyzed these trends thoroughly when we first started covering this stock last year, and to summarize it once again, it has to do with the rising rig counts within the US. With environmental concerns firmly on the back burner, the US is once again going all-out on domestic energy production, and as a result, midstream giants with extensive infrastructure are set to benefit from robust secular tailwinds. The company sports a $38 billion market cap.
Energy Transfer will continue delivering value to shareholders. This includes improving its balance sheet position, with $1 billion in debt pared down in the first quarter alone, aiming for a leverage ratio of 4 to 4.5x. Trading at just 0.44 times sales, it is remarkably undervalued for a stock boasting a yield of 10%, ending the quarter with $1.2 billion in cash, and $47 billion in debt.
The firm has a significant portfolio of long-term contracts in place. These contracts play a crucial role in ensuring stable revenue streams and mitigating price volatility risks. While specific details may vary, Energy Transfer typically enters into long-term agreements with producers, shippers, and end-users for the transportation, storage, and processing of natural gas, crude oil, refined products, and other commodities. A typical example of a long-term contract is a transportation agreement with a natural gas producer. Under this contract, Energy Transfer agrees to provide transportation services for a specified volume of natural gas over a period of 10 years. The contract stipulates a fixed transportation fee per unit of gas transported, providing predictable revenue for the company. Additionally, the agreement includes a minimum volume commitment, requiring the producer to ship a minimum amount of gas each year. Failure to meet the commitment may result in penalty payments. This long-term contract ensures a stable revenue stream for ET while offering the producer reliable transportation services for their natural gas.
Our Target is $14 and our Sell Price is $10. We would not hesitate to buy more at this level and could expect to see a 15-20% return per year in the future. Even if most of that is from dividends, it still counts as a win.
Shopify (SHOP: $62, up 28%)
High Technology Portfolio
eCommerce platform Shopify posted phenomenal first quarter results last week, reporting $1.5 billion in revenues, up 25% YoY, compared to $1.2 billion a year ago. The company posted a profit of $12 million, against $25 million last year. The unexpected beat on the top and bottom lines sent the stock higher following the results.
The company further continued its stellar streak across core operating metrics, starting with gross merchandise value at $50 billion, up 15% YoY, compared to $43 billion a year ago, followed by gross payment volumes at $28 billion, up 25% YoY, compared to $22 billion. Merchant and subscription solutions revenues came in at $1.1 billion and $380 million, up by 31%, and 11%, respectively.
Shopify had an eventful quarter, marked by significant additions of notable brands to its platform. The company witnessed a surge in the number of prominent brands choosing to utilize their e-commerce infrastructure and services. These brands recognized the value of Shopify's robust and user-friendly platform, which enables them to establish and grow their online businesses efficiently. It further announced the launch of Commerce Components by Shopify, a modern tech stack for enterprise retail, in addition to updated pricing across its basic and advanced plans, which went into effect for all new and existing customers two weeks ago.
The most important announcement, and one that came as a relief for shareholders and analysts, was the sale of its logistics business to Flexport, in return for a 13% stake in the firm. Given the nature, complexity, and laser-thin margins in this segment, this was a much-needed move, allowing Shopify to focus on its core competencies of building on its powerful e-commerce platform and network.
Shopify remains increasingly focused on profitability, as evidenced by the 20% cut in its headcount. Profits during the quarter would have been a lot higher, if not for the severance expenses of $150 million. The company’s balance sheet remains as robust as ever, with $4.9 billion in cash, just $1.6 billion in debt, and $100 million in cash flow, as it goes from strength to strength across its core businesses. We hold Shopify at the top of our list of investments for future growth. Our Target of $60 was hit this past week and we are raising it to $80 today. We would never sell the stock. The all-time high is $176, set in late 2021. This was the peak of its run from the $14 level in 2018. (We added it at $7 in 2017.)
SHOPIFY HAS A PLATFORM, like Facebook, like Apple’s App Store, like Google, like Amazon, and it is the most powerful tool in the world for young entrepreneurs to set up businesses and create wealth for themselves and their families. And when they succeed, the company takes part in their success. They are crushing the competition and will continue to dominate for decades to come.
Visa (V: $232, flat)
In the face of tough global macro conditions, payments giant Visa has continued to exceed expectations with its second-quarter results recently. The company posted $8.0 billion in revenues, up 11% YoY, compared to $7.2 billion a year ago, with a profit of $4.4 billion, or $2.09 per share, against $3.8 billion, or $1.88, with a huge beat on the top and bottom lines.
The company continued its stellar streak across core operating metrics, with payment volumes, cross-border volumes, and total payments processed, up by 10%, 24%, and 12%, respectively. This growth shows no signs of slowing down, with the double-digit growth across volumes, revenues, and earnings set to continue during the third quarter, thanks to its extensive dealmaking and ceaseless product innovation.
The global payments processing industry is essentially a duopoly dominated by Visa and Mastercard, both with wide moats keeping new entrants at bay. Visa currently has over 5 billion active debit and credit card accounts across 200 countries. The broad-based shift away from cash, and towards digital payments creates a robust secular tailwind for the company that is set to last throughout this decade and beyond.
Visa maintains this lead with long-term partnerships with leading financial institutions across the world, often with the help of incentives that cost as much as 27% of its gross revenues. During the second quarter alone, the company renewed agreements with the likes of TD Bank and CIBC*, among others. It further signed new card issuance deals with fintech companies Stripe and Adyen during the quarter.
* one of the largest banking institutions in the United States.
The most notable event during the quarter was the launch of Visa+, which represents the future of the company, offering instant peer-to-peer transfers across payment modes such as banks, PayPal and Venmo, wallets, apps, and more. The company continues to reward shareholders generously, with $3.2 billion in repurchases and dividends during the quarter, hardly making a dent in its balance sheet with $17 billion in cash, $21 billion in debt, and $19 billion in cash flow. Our Target is $265 and we would never sell the stock. The stock hit a 2-year high this past week. As this bull market continues, this stock will lead the pack and hit a new all-time high ($252), set in the summer two years ago. We can’t wait to raise the Target to $300.
Bill Holdings (BILL: $94, up 22%)
High Technology Portfolio
Payments solutions company, Bill Holdings (new name) posted a monumental third quarter performance, with revenues at $270 million, up 63% YoY, compared to $170 million a year ago. The company posted a profit of $60 million, or $0.50 per share, against a loss of $9 million, or $0.08, with a phenomenal beat on consensus estimates on the top and bottom lines.
The company currently serves over 450,000 small businesses, up from 386,000 last year. It has processed payments of $65 billion across 21 million transactions, an increase of 13% and 36%, respectively. In addition to subscription and transaction fees, the company generated interest earnings of over $30 million on the customer balances that it holds on its books. (With the higher rates come some benefits!)
Bill and its subsidiaries Invoice2Go, Divvy, and Finmark offer small businesses with a seamless solution to handle all of their back-office operations. This includes accounts payables management, receivables, spend management, and everything in between. It currently counts over 6,000 accounting firms, including PWC and KPMG as its partners, along with 6 of the top 10 financial institutions.
Thus far, the company has barely scratched the surface of its massive global potential, which it estimates at 30 million small businesses and sole proprietorships within the US alone, and over 70 million around the world. It is currently a leading provider in this space, with features and functionality that are second to none, as evidenced by its phenomenal 130% net dollar-based retention rate, which means 30% of additional revenues coming from existing customers.
During the quarter, the company repurchased $27 million of stock, which we think is rather premature, but it is mostly aimed at making up for stock-based compensations to avoid the dilution of common shareholders, which is commendable. Given its robust balance sheet with $2.6 billion in cash, debt of $1.8 billion, and coupled with its newfound profitability and cash flow of $34 million, it will afford to reward shareholders generously. Watch for bigger buybacks and a dividend in the coming years. Our Target is $125 and our Sell Price is $80. This stock is a recent case of holding onto a stock that had gone below our Sell Price. In many cases, it is wise to hold on to these great companies.
Moderna (MRNA: $137, up 3%)
MRNA vaccine pioneer Moderna released its first quarter results last week, reporting $1.9 billion in revenues, down 70% YoY, compared to $6.1 billion a year ago. The company posted a profit of $80 million, or $0.19 per share, against $3.7 billion, or $8.58 per share. The stock soared following the results, owing to a stronger-than-expected, surprise profit, and the top-line performance during the quarter. The drop in the company’s sales was expected as the demand for its COVID-19 vaccine starts to wane, however, a sudden spike in demand for its only marketable product, gave investors much to cheer. Moderna maintains its guidance for 2023, with sales expected at $5 billion from advanced purchase agreements of the same Covid vaccine, around the world, throughout this year.
The company posted a profit during the quarter, after accounting for $150 million in write-offs for vaccines that exceeded their shelf lives, in addition to $135 million in unused manufacturing capacity expenses. It is further encouraging to see new contracts being inked for its COVID-19 vaccines across US government agencies, pharmacies, hospital chains, and more, pointing towards resilient demand even as the peak of the pandemic is past us.
Moderna expects the demand for boosters, especially among seniors and people with weak immune systems to continue, resulting in a steady revenue stream. The company currently has five different vaccines in early clinical trials and expects to launch its RSV* and flu vaccines in 2024. It projects revenues between $8 billion and $15 billion by 2027 from 6 major respiratory vaccines. The windfall gains during the course of Covid have helped the company double down on its R&D, with expenses in this segment up by 100% YoY. Moderna has used some of the proceeds of its huge inflow of revenue to reward shareholders, with $530 million in stock repurchases during the quarter. With $3.4 billion in cash and $1.8 billion in debt, it remains well-capitalized for the road ahead. As noted above Moderna has projected 2023 sales of the vaccine to reach at least $5 billion. That figure does not account for contracts that could be signed this year. The company specified the potential for deals with the U.S., Europe, and Japan, among others. The company will increase its R&D investment to $4.5 billion in 2022, it said. Moderna has 48 programs in development, with 36 clinical trials ongoing.
* Respiratory syncytial (sin-SISH-uhl) virus, or RSV, is a common respiratory virus that usually causes mild, cold-like symptoms. Most people recover in a week or two, but RSV can be serious, especially for infants and older adults.
Our Target is $250 and our Sell Price is $150. Yes, the stock is below our Sell Price so you should consider the risks here. We’re going to stick with it, as we see tremendous growth ahead as its R&D begins to pay off. Yet there are no guarantees, and sometimes Wall Street doesn’t enjoy the wait, punishing the stock along the way. It is currently out of favor, but we see it differently, and view it as a tremendous buying opportunity.
Universal Display (OLED: $137, up 3%)
Special Opportunities Portfolio
A leading manufacturer and designer of energy-efficient displays and lighting technologies, Universal Display released its first quarter results last week, reporting $130 million in revenues, down 13% YoY, compared to $150 million a year ago. The company posted a profit of $40 million, or $0.83 per share, down from $50 million, or $1.05, owing to inflationary pressures and macro uncertainties.
The company generated $70 million in material sales during the quarter, down 20% YoY, compared to $87 million. This is followed by royalties and licensing fees at $55 million, down 8% YoY, compared to $60 million, and its up-and-coming contract research services business at $5 million, up 25% YoY, from $4 million. This segment is expected to grow exponentially as OLED technology gains pace.
While the company anticipates a slowdown during this year, largely owing to the macro uncertainties and inflationary pressures, it remains confident of steady tailwinds from a new OLED adoption cycle. It has since acquired the phosphorescent emitter patent portfolio of German-based Merck KGaA, in order to further strengthen its position in the segment, and capitalize on the broad secular tailwinds.
Universal Display disappointed investors with a bleak guidance for 2023, and during its first quarter results, it has continued to maintain the same figures, projecting a YoY decline of 7%. It has, however, signaled potential for a strong rebound in 2024, which has helped the stock command higher multiples, despite being one of the worst performers in the semiconductor segment over the past year.
This is a stock for the long-term, being steeped in science and deep research; investors won’t do well to judge it on its quarterly game. The stock has been on an uptrend throughout this year, posting gains of 28% YTD, but still remains down by over 45% from its peak in 2021. It issued a dividend representing an annualized yield of 1% (Zzzzz), before ending the quarter with $160 million in cash and just $40 million in debt. Our Target is $145 and the Sell Price is $115, which we are raising to $130. If it goes below this price, we are out. Having added it at $95 in 2018, it’s been a long haul here with a lot of disappointments. Yes, you’ve made money, but we are tired of the slowing growth of the company in a market where they should be growing at 20-30% a year. This is not happening. $130 and out.
Teladoc Health (TDOC: $26, down 1%)
Telemedicine and virtual healthcare company Teladoc released its first quarter results recently, reporting $630 million in revenues, up 11% YoY, compared to $570 million a year ago. The company posted a loss of $70 million, or $0.42 per share. The results were ahead of estimates at the top and bottom lines. The company continued to see growth across key metrics and segments last quarter, starting with total integrated care members at 85 million, up from 79 million a year ago. The BetterHelp online mental health platform ended the quarter with 470,000 paying members, up from 380,000 users a year ago, followed by its chronic care program enrollment at 1 million users, up from 910,000 users during the year ago period.
Full-year revenue increased to $2.4 billion last year. Management expects revenues for 2023 to be about $2.6 billion, an improvement of 9% from 2022. Adjusted EBITDA is anticipated to be about $305 million, which suggests 24% growth from the 2022 figure of $245 million.
Teladoc, however, witnessed a marginal decline in its average revenue per user at $1.39, down sequentially, as well as on a YoY-basis, at $1.44 and $1.41, respectively. The company’s enterprise business that caters to employers and health plans reported $350 million in revenues, up 5% YoY, and represents a key growth driver for the company as employers revamp their health and wellness perks.
As demand for weight loss drugs continues to grow in the US, Teladoc’s pre-diabetes and weight management program is set to join the fray, offering diet and nutrition counseling, mental healthcare, fitness tips, and even prescriptions for GLP-1 drugs such as Ozempic. Following its fiery streak during the pandemic, Teladoc is set to play an outsized role in US healthcare, even though growth has flat-lined on a YoY basis.
As of now, the company remains focused on profitability, laying off 300 workers in January to lower operating costs, but its biggest expense still remains user acquisition, via extensive digital advertising spending. The stock trades at a valuation of just 2 times sales, with $900 million in cash, $1.6 billion in debt, and $230 million in cash flow. The big drag of course is profitability. Wall Street just can’t take it. And we don’t blame them (whoever “them” is. Oh – it’s us!) Yes, we can’t take it. What can one do about this is the question. You can sell all, buy more, or sit and wait. We remain quite amazed at the huge revenues that the firm has created, but we are also amazed at how they can’t figure out how to make money.
Our Target is $72, which is way too high. We’re lowering it to $42. We have no Sell Price currently because we can’t imagine the stock going much lower from here. But in reality, anything can happen on Wall Street. Thus, we are instituting a Sell Price at $22. $22 and out. The investment has certainly been a disaster as we are down significantly. This was one where we should have honored our initial Sell Price.
The High-Yield Investor
The Bull Market Report
Jay Powell raised a few eyebrows this week saying that conditions in the banking industry are getting better when reportedly half of all banks are already “potentially” insolvent. Is he whistling in the dark, hoping we don’t panic and trigger a 2008-style crash? Has he gone crazy?
Despite all the anxiety and dread, we have to come down (a little narrowly) on his side. We’re actually a long way from a Lehman Brothers “too big to fail” failure. We know this because we know how the banking landscape has actually evolved in the last 15 years. There are 4,200 banks. Most are very small, not even “regional” in scope. At a glance, not 400 of them are big enough to be publicly traded and the bar there is extremely low. The smallest bank stock on our radar, Carver (CARV), is worth just $18 million. It’s hurting, don’t get us wrong. Earnings have crashed in the squeeze between higher lending rates and deteriorating credit quality. But it’s 0.02% the size of Citi (C) today. Its problems are not systemic or contagious. Ten years ago, the 10 biggest institutions held more than half of all U.S. deposits. Today their footprint has grown to two thirds of deposits, leaving everyone else fighting over a shrinking piece. That’s bad for all those smaller banks, but as long as the bulge bracket remains strong, the industry as a whole won’t show much strain.
And the Big Banks just reported earnings. They’re confident. They’re doing fine. While they are arguably too big to be allowed to fail at this point, they’re big enough to look out for themselves. That’s what Powell sees. While it’s sad and a little scary to see a Silicon Valley Bank or a First Republic Bank implode, these companies weren’t even 1/20 the size of Lehman Brothers back in the day. They make headlines but headlines don’t rock the boat. Remember, there are 4,200 of them and between them they hold a third of all U.S. deposits. Their feelings don't bend the fundamentals for the system as a whole.
If you're worried about the system as a whole, you should be worried about the fundamentals. Everything else is just feelings, and Wall Street has infamously never shown a lot of respect for emotion unless there are numbers to back it up. Will Powell keep tightening until a truly important institution breaks? That’s the real question because your gut response says a lot about your sense of the Fed’s authority. If you think Powell and company are more likely to overreach than correct at the first sign of crisis, you’re in a miserable situation. We can’t fight the Fed. If the Fed is incompetent, there’s no place to hide.
Lately the market’s faith in the Fed has been faltering. We started to see it when Powell suddenly decided in 2019 that there was no reason to maintain interest rate discipline in the absence of inflation. He was more interested in boosting the economy and keeping the market cheering. Then in the early stages of the pandemic, he clearly panicked. When the threat of a 2008-style credit crisis became real, rates went straight to zero. Now here we are. Powell is talking tough as long as inflation is on the table, but it’s hard to ignore his track record, and harder than it once was to trust the Fed to act as long-term steward of the economy as a whole.
We’re a long way from the invincible era of Alan Greenspan, much less Ben Bernanke. But even those icons ultimately revealed feet of clay. Greenspan triggered both the dotcom and the 2008 crashes. Bernanke cleaned up the latter, but the results were far from robust. At the end of the day, while we can’t fight the Fed, we’re still free to make up our own minds. We think Powell is right to do what it takes to beat inflation into submission. We also think he’s right that the banking environment as a whole remains robust.
But we know that if big banks start breaking, he’ll flinch. For now, we are not buying the little banks on the dip. We are actively culling our Financial recommendations instead. Let this shake out. We’ll be here to pick up the pieces, just like Jamie Dimon and his cronies at the big banks are picking them up even as we speak.
AGNC Investment (AGNC: $9.91, down 4%. Yield=15.2%)
High Yield Portfolio
One of the largest Mortgage REITs, AGNC Investment released its first quarter results two weeks ago. The company managed to deliver a profit of $410 million, or $0.70 per share, against $380 million, or $0.72 per share, but this came at the price of a massive miss on top-line figures. While the company’s agency mortgage-backed securities (MBS) portfolios started to perform well during the first half of the quarter, things started turning sour in the later weeks, with regional bank instability, interest rate volatility, and a broader macro uncertainty, all weighing it down. As a result, the company’s MBS portfolio underperformed treasuries and swaps in March, resulting in a negative economic return.
The negative economic return resulted in a $0.43 decrease in its book value to $9.41 per share, compared to $9.84 the prior quarter. As a result, the stock now trades at a premium to book value, making AGNC the only Mortgage REIT currently to do so. This is not consistent with the mood around this corner of the market, where stocks generally trade at significant discounts to book value because investors remain wary and reluctant to hold their positions in what could become an economic crisis. With that said, now is the perfect time to exit this stock, as it is unlikely to continue to trade at a premium forever.
It might seem crazy to exit this stock right now with the stock producing a 15% annualized yield in monthly $0.12 per-share installments. But we believe that its spread income has peaked and will start deteriorating from here. While remaining assets theoretically pay enough now to cover the dividend, AGNC has consistently sold off its holdings, down from $90 billion to $57 billion over the past two years, all the while continuing to dilute investors with fresh stock issuance, undoing any potential bright spots. We’ve collected a lot of money from dividends over the years, but the retraction in the stock itself has taken it all away. We reluctantly say goodbye to this Mortgage REIT. The inverted yield curve has taken another prisoner.
Apollo Commercial Real Estate Finance (ARI: $9.52, down 6%. Yield=14.7%)
High Yield Portfolio
This New York-based mREIT predominantly invests in senior mortgages, mezzanine loans and other real estate-backed debt instruments. Despite all the anxiety around the credit market, business is actually good here . . . and we have more than vague assurances to back up that statement. The latest quarterly revenue figures show $70 million coming in (up 29% compared to $55 million a year ago) and a full $0.48 per share turned into profit. A year ago, Apollo was running at full speed and only booked $0.35 per share in profit. That was enough to pay the long-established dividend and it's now likely that management will either stockpile the extra cash for any anticipated rough times ahead or, in the absence of real strain, simply distribute it to loyal shareholders.
The company ended the quarter with a loan portfolio worth $8.5 billion, with an unlevered, all-in yield of 8.6%. It funded an additional $170 million worth of loans, mostly refinancing two floating rate mortgage loans, in addition to the add-on fundings of $114 million during the quarter. The firm further received proceeds to the tune of $500 million from repayments and the sale of loan assets.
Originations have taken a plunge during the first quarter, largely a result of the high interest rates that have made it too expensive to borrow. The rising interest rates over the course of the past year and a half have served the firm well, since 99% of its portfolio remains concentrated in floating rate loans, but this creates a downside risk when the Federal Reserve changes course and starts lowering rates.
This explains the fact that the stock is trading at a monumental 62% discount to book value, offering yields as high as 15%. While investors worry about its distributable earnings taking a hit in a true crisis and leading to a cut in dividends, we suspect this concern is rather overblown. After all, no credible analyst on Wall Street currently projects earnings dropping below $1.47 per share this year (based on the previous quarter, something above $1.60 is far more likely) and even in 2024, the odds of Apollo reporting less than $1.30 per share are extremely low. Put that into context: management can bank anything better than $1.40 this year against future dividend obligations and ride out any economic disaster.
Admittedly, 2020 was a bad year for Apollo. Earnings dropped to $0.84 per share as the Fed gyrated and the yield curve crumpled. But that was a scenario when floating interest rates came as close to zero as they get. If you're anticipating a COVID-style worst-case outcome, that's it. Otherwise, rates might go down incrementally . . . without dropping to the point where Apollo feels that same level of pressure. The stock remains down by over 9% YTD, largely owing to the regional banking crisis, volatile interest rates, and risks of a downturn. While there are risks pertaining to this stock, we believe the opportunity and potential far outweigh these risks.
Todd Shaver, Founder and CEO
The Bull Market Report